Date posted: 27th Feb 2026
A year from now (in April 2027), payrolling benefits will be the default reality for most employers – so the next 12 months are your window to get ready, test systems and bring employees with you on the journey. This article looks at what payrolling benefits actually means, why it is changing, and what you should be doing in the next year
What is payrolling benefits?
Payrolling benefits means you tax most Benefits in Kind (BiKs) through the payroll in real time, rather than reporting them once a year on P11D. The taxable value of each benefit is spread across the year and added to the employee’s taxable pay each pay period, with PAYE tax deducted as normal. National Insurance treatment is unchanged: Class 1A NIC will still be due annually on most BiKs.
In practical terms, if an employee receives a benefit worth £600 a year, £50 would be added to their taxable pay each month and taxed via payroll rather than via a coding adjustment after the year end. The benefit itself is not “paid in cash” – only the tax on the notional amount passes through payroll.
Why is it changing?
The move to payrolling is part of a wider modernisation of the PAYE system, aimed at making tax more accurate and transparent for employees and reducing year‑end paperwork for employers. Under the traditional P11D approach, employees often face tax code changes and unexpected underpayments long after the benefit was provided, which can create confusion and financial stress.
By collecting tax on benefits in real time, employees pay the right amount of tax as they go, and employers avoid large volumes of P11Ds and associated queries after the end of the tax year. For many HR and payroll teams, this also aligns better with real‑time information processes that are already embedded in their payroll cycles.
The benefits – and the challenges
Done well, payrolling offers several advantages:
- Simpler reporting: Fewer P11Ds to complete and a more streamlined year‑end process.
- Better employee experience: Employees see the effect of benefits on their tax in their regular payslip, helping them understand the true value and cost of their package.
- More accurate tax: Reduced risk of under‑ or over‑paid tax due to delays in coding notices and benefit updates.
However, there are real challenges that make this “year to go” critical:
- Payroll system readiness: You need to be sure your software can handle payrolled benefits, including mid‑year changes and starters/leavers.
- Data quality and processes: Benefit values must be captured accurately and on time so that the correct amounts are taxed each period.
- Communication workload: Employees must be told clearly what is changing, how it affects their tax codes and why they will not be taxed twice.
A year to go: what you should be doing now
With a year to go, the focus should be on planning, piloting and communication rather than last‑minute compliance. Key steps include:
- Map your current benefits: List all Benefits in Kind, how they are provided and how they are currently reported, and check which can and cannot be payrolled under the rules.
- Review payroll capability: Work with your software provider or internal IT to confirm how benefit values will be input, updated and reported through payroll, including estimates where the final value is not known at the start of the year.
- Design your processes: Agree who is responsible for notifying changes (for example, new cars, changes in medical cover), how often data will be updated, and how you will handle leavers and joiners.
- Plan employee communications: Draft clear, plain‑English explanations for employees that cover how payrolling works, what will appear on payslips and what it means for their tax codes.
- Run a dry run or pilot: If possible, use a test environment or a small group of benefits to trial your approach before the mandatory date, so you can identify issues early.
Bringing employees with you
Success will depend as much on communication as on system changes. Employees will want reassurance that they are not being taxed twice and that any changes to their net pay are understood and predictable.
You should aim to:
- Provide simple examples showing how a typical benefit will be taxed over the year.
- Explain that their tax code may be adjusted to remove old benefit entries once payrolling is in place, and that this prevents double taxation.
- Make it clear where they can go with questions – HR, payroll, or a dedicated inbox – especially in the first year.
With a year to go, there is still time to make payrolling benefits a controlled, well‑understood change rather than a last‑minute scramble. Early planning will help you minimise risk, reduce admin and give employees a clearer view of the true value of their reward package.
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